Michelle Girard is a managing director and senior economist at Royal Bank of Scotland. She appears often on NBC, CNBC, Nightly Business Report, Bloomberg, and Fox News.
Does the recent batch of data justify the conclusion that the recession is over and recovery is starting?
M.G.: It’s clear that the data have in most cases turned a corner in the sense that they’ve stopped declining and seem poised to resume growth in the second half of the year.
The progress has definitely been uneven, with housing and manufacturing activity doing better in recent months than the consumer and jobs data, but we believe that the official end date for the recession will ultimately be sometime in the third quarter.
Let’s look at August housing starts up 1.5 percent from July, new home permits up 2.7 percent, stabilizing home prices, and stronger retail sales. What do you think of those items?
M.G.: Housing has had a boost with the first-time homebuyer $8,000 tax credit, so we’ve definitely seen a pickup in demand as well as construction activity related to that. Similarly, the “Cash for Clunkers” program boosted retail sales noticeably in the month of August. In both cases I think some of the strength may come at the expense of future demand, but even taking that into account, it looks like in both cases the worst of the downturn is certainly over.
What about the labor situation: initial jobless claims declining 12,000 from the week before, continuing claims up 129,000, and the 9.7 percent jobless rate?
M.G.: Certainly the job situation has not improved nearly as much as some of these other indicators. The initial claims figures remain stubbornly high, not far from their recent peak, and even the declines in continuing claims appear to be due mainly to people exhausting their regular unemployment benefits and moving into the federal extended benefits program.
So the declines in continuing claims are a bit misleading. However, looking at the payroll figures we are certainly seeing a gradual slowing in the pace of decline, and while many are pessimistic about the labor market and believe this will be a jobless recovery, we are more upbeat.
In our view, the declines in employment registered during this recession are among the most severe on record, and history shows that sharper payroll declines such as we saw during the contractions of the 1970s and 1980s actually lead to sharper rebounds when the economy improves.
The problem is that the last two recessions, which stand out most in people’s minds, were very shallow downturns followed by very gradual upturns. Therefore, comparing the potential recovery after this recession to those recent recoveries may not be appropriate. We think the rebounds in the 1970s and ’80s are more relevant.
Since credit is still tight and our deficit is exploding, how can there be clear sailing upward for our economy?
M.G.: The amount of monetary and fiscal stimulus added to support the economy will lead to a recovery in economic activity. Of course there will be headwinds, and the relatively tight credit conditions and the overhang of debt are two examples of this.
In our view, neither factor will be sufficient to prevent a recovery but instead may just moderate the pace of growth. Our forecast for growth in gross domestic product next year is 4 percent, which actually takes these drags into account. If it weren’t for those factors and some others, such as the need for consumers to increase savings, we would expect a much more vigorous rebound in activity, such as those seen in the ’70s and ’80s, when GDP growth in the first year of their expansions was as strong as 6 or 7 percent.
We keep telling people not to confuse levels and changes. It’s like a stock that falls from $100 to $10. It can rebound to $40, marking a huge increase, but the level is still lousy. It’s the same for the economy. GDP fell so sharply in this downturn, that you can have 4 percent growth, and the level of activity is still relatively low, so things don’t necessarily feel all that great.
As our deficit soars into the trillion-dollar range, are you worried that China and other global buyers of our debt, which finances U.S. spending, will buy less and therefore mute any economic recovery?
M.G.: The problem is bigger than China in that it’s been easy for the government to issue debt and fund the deficit when there’s been few alternatives for investing. People have been willing to buy Treasuries in the midst of a recession because they didn’t want to buy stocks or corporate bonds. When the economy recovers, as we’re starting to see and alternative investments begin to look much more attractive, it will become much more difficult for the government to fund its deficit and that will likely mean higher interest rates to entice investors.
You’re going to have higher tax rates, which will work against growth. You’re going to have regulation which will be much more burdensome than it is — all of these factors do pose risks for the strength of expansion after we get past this recovery period. So we may have a year or two where growth looks very strong, but over the subsequent five years because of these factors, growth will struggle to stay above trend.
The dollar has been weakening dramatically, raising commodity prices, among other effects. Is dollar weakness good or bad for our economy?
M.G.: It’s never a positive for our economy in that it signals reduced desire for people to invest in the U.S. The dollar weakness that we are seeing is actually not terribly surprising, given the fact that we are looking at an incredibly stimulative monetary policy. In effect, the Federal Reserve has flooded the system with dollars, and the value of a dollar has gone down, and that’s consistent with the rise in commodity prices.
